According to experts credit cards don’t always have to be bad. Tyler Dolan a certified financial planner said, “Credit cards don’t always have to be bad. They can help you down the line … as long as you’re responsible.”
He added that the better your credit history, the lower the interest rate on your future loans. And it can be tough to get a credit card after shunning plastic for years.
That’s where your student loans can help.
“Each loan that a student takes out per semester counts as a new line of credit, almost like a new loan,” Dolan said. “If you pay those loans on time, you are building a great credit history.” He recommends checking where you stand on Creditkarma.com, which shows each piece of a credit score and gives recommendations for how to improve it.
Here’s how to start building a credit history, for the day you’ll need it.
1. Get on someone else’s card
A family member might agree to let you become an authorised user on her card. Basically, her credit history – which we’re assuming is good – is now yours.
“It can be a huge boost to someone without credit,” said Gerri Detweiler, head of market information for NAV, which provides free business-and -personal-credit scores. You really have to trust people to put them on your card – if they go on a spending spree, you’ll be liable.
Dolan’s mother had him on her card while he was in college so he could build a credit history, with the proviso that he use it only for emergencies and occasional groceries.
2. Get a ‘starter’ credit card
Look for a card that has no annual fee and no reward program, and you’ll definitely want to pay it off every month. Jill Gonzalez, an analyst for Wallethub said while people with a short or blotchy credit history get cards with high-interest rates, a 14 percent interest rate is average for those with good credit, and the rate could be 9 percent to 12 percent for someone with excellent credit.
Use the card responsibly, and over time your credit limit, which may start at $500(estimated R7 470), will be bumped up, maybe to $1 000 (estimated R14 930) after half a year.
“Once you’ve had that card for six months, a lot more offers will come in that you might be pre-approved for,” said Gonzalez. They’ll likely have a lower interest rate and a reward or cash-back program.
Along with paying the card off every month, it’s important to keep your spending well below your credit limit. Millennials have less credit card debt and fewer credit cards, on average, than older generations, according to CreditSesame.com, but those below age 25 use the highest percentage of their credit limit, at 27 percent. That makes sense, since they’ll have the lowest limits, but it puts them at risk of having their credit score dinged for using more than 30 percent or so of their available credit.
3. Apply for a secured card
To get a secured card, you put down a cash deposit as collateral; in many cases, that’s also your credit limit. As you promptly pay the balance in full over at least six months, you build a credit history. If you have a checking account with a big bank, that should be your first stop for a secured card, said Mike Cetera a personal loans and credit analyst.
“Be very wary of seeking a secured card from a company you’re not familiar with,” he said, because some companies that specialise in offering secured cards have “horrendous fees.”
4. Take out a credit-builder loan
If you don’t have a chunk of cash to use as collateral, a secured card may not be an option. With credit-builder loans, you’re basically borrowing from yourself to build a credit history. The loan goes straight into a savings account, and you make monthly payments until the amount of the loan is paid in full. Then you get your money back, minus a small amount of interest.
5. Document debt payments
Some landlords and utilities report rent payments to the credit bureaus, but it’s hit or miss, said Bankrate’s Cetera. Dolan of the Society of Grownups recommends that renters get receipts from all their rent payments.
“If they want to buy a house down the road, it might help to show that record to the mortgage lender,” he said. “It’s not on your credit history, but anything you can do to document that you are responsible with your debt payments helps.”